Applied Economics

ISSN: 0003-6846 (Print) 1466-4283 (Online) Journal homepage: http://www.tandfonline.com/loi/raec20

Bid dispersion, competition and wage regulation:

some field evidence from public contract bidding
in British Columbia

Cihan Bilginsoy

To cite this article: Cihan Bilginsoy (2000) Bid dispersion, competition and wage regulation:
some field evidence from public contract bidding in British Columbia, Applied Economics, 32:6,
717-722, DOI: 10.1080/000368400322336

To link to this article: http://dx.doi.org/10.1080/000368400322336

Published online: 04 Oct 2010.

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 Applied Economics, 2000, 32, 717 722

Bid dispersion, competition and wage

regulation: some eld evidence from public
contract bidding in British Columbia
C I H A N B I L G I N S OY
University of Utah, Department of Economics, 1645 E Central Campus Dr Front, Salt
L ake City, UT 84112-9300 , USA
Downloaded by [Jordan Univ. of Science & Tech] at 22:29 23 February 2016

The paper uses data from British Columbia to show that bid dispersion (the di er-
ence between the winning and next-lowest bids) in public school construction con-
tract bidding is very compact, and that it varies inversely with the degree of
competition. It also examines the impact of the Skill Development and Fair Wage
Law (SDFWP), which promulgated wage scales and required contractors to pay
them in public construction projects, on the bid dispersion. Multivariate analysis
shows that bid dispersion declined after SDFWP. One possible interpretation of this
result is that the contractors became less prone to the winners curse following the
SDFWP.

I . I N T R OD U C T I ON `fair wage on public construction projects in order to pre-

The bid dispersion is a critical indicator of the distribution
of information signals of bidders in an auction. In a recent
article Dyer and Kagel (1996) analysed bid dispersions
measured as the di erence between the winning and the
next-lowest bids in contract bidding for various types
of construction projects to infer how prone contractors
are to the `winners curse. They compared these with bid
dispersions of the outer continental shelf (OCS) hydrocar-
bon lease auctions reported by Hendricks et al. (1987) and
concluded that the potential for adverse selection is much
smaller in the construction industry. They also found that
the bid dispersion varied with the degree of competition
and the average bid. In this paper, data from British
Columbia (BC) is used to present some new evidence on
the bidding behaviour of contractors under alternative
wage regulation regimes.
The paper has two objectives. First, the within-tender
bid dispersion in a sample of BC school projects and the
e ect of the number of bidders and the project size on the
bid dispersion are analysed. The second objective concerns
the Skill Development and Fair Wage Policy (SDFWP)
established by the BC provincial government on 31
March 1992. The SDFWP is similar to the prevailing
wage laws of the US. It requires contractors to pay the
Applied Economics ISSN 0003 6846 print/ISSN 1466 4283 online # 2000 Taylor & Francis Ltd
http://www.tandf.co.uk/journals/tf/00036846.htm l
vent competition for contracts on the basis of wages, and
determines the wage scales for the construction trades. The
existing literature on prevailing or fair wage laws has
focused on their impact on construction costs. Here, the
focus is directed elsewhere, to their impact on the bidding
behaviour. The SDFWP changes the information content
of the auction because the bidding contractor faces less
uncertainty concerning his/her own labour costs and has
more information on the competitors labour costs. The
paper examines whether the changing regulatory environ-
ment that reduces the degree of common uncertainty over
the true value of the project a ects the bidding behaviour
of contractors and competition over contracts.
Approximately half of the projects under study are auc-
tioned before the passage of the SDFWP, providing a
unique opportunity to carry out this `before after compar-
ison. Bid dispersion is measured by the di erence between
the winning and the next-lowest bids.
The following section brie y summarizes the theoretical
framework. The data are described in Section III. Section
IV presents descriptive statistics on tenders and bids.
Section V focuses on the determination of the bid disper-
sion and the impact of the SDFWP on the bid dispersion in
a multivariate context. The concluding section summarizes
the ndings.
717
 718
I I . B I D D I N G , C OM PE TI T I ON A N D
I N F OR MA T I ON
In public construction auctions, contractors submit sealed
bids for the project by a xed deadline and the owner
awards the contract to the lowest bidder, provided that
s/he is a reputable contractor. Auction theory proposed a
series of hypotheses on the determination of the optimum
bid in one-shot rst-prize auctions under alternative
information structures. These studies generally assume
that bidders are symmetric, risk neutral expected pro t-
maximizers, and that information on the competitors and
their bidding history is common knowledge. Let xj stand
for the independently distributed information signal
received by contractor j, and c be the cost of construction,
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unknown prior to the completion of the project. Then
contractor js expected pro t is bxj Ecj jxj , where common and private value assumptions. The following sec-
bxj is the optimal bid and Ecj jxj is the estimated cost tions explore if evidence from BC supports this hypothesis
of construction. In determining the nal o er, the
contractor estimates the cost of construction conditional
on the sample information, and then adds a mark-up to
obtain the optimum bid. The nal o er must be high
enough to yield a positive expected pro t, but low enough
to beat competitors.
Under the so-called independent private values model cj
and xj are identical. Any di erences between the estimated
and the true cost are attributable exclusively to the indi-
vidual contractor, such as its relationship with its foreman,
crew, or subcontractors. This individual nature of uncer-
tainty is the hallmark of the earlier bidding models, which
followed the work of Friedman (1956). One implication of
the private values model is that the nal o er will be nega-
tively related to the number of competitors.
The alternative is the common values model in which
case bidders face some collective source of uncertainty in
estimating the cost of construction, such as weather con-
ditions, physical characteristics of the land, or the state of
the labour market. In this case all bidders make unbiased
estimates of the true cost of construction. By the nature of
the auction mechanism, however, the winning bid has the
lowest information signal value, and is therefore biased
downward. Unless the adverse selection e ect is fully
accounted for by bidders, the winner is prone to less than
anticipated or even negative pro ts. This problem is known
as the `winners curse. Economic theory suggests that an
experienced contractor should add a surcharge to its bid in
order not to fall victim to the winners curse (Milgrom,
1989). In this case the impact of an increase in the number
of bidders is the outcome of two con icting factors: an
experienced bidder is forced to lower the bid as a result
of competitive forces, and to raise it in order to avoid the
prospect of adverse selection.
Independent private and common values models are
polar cases, and the real world lies somewhere in between,
incorporating elements of both models. Elsewhere the
C. Bilginsoy
author found that the relationship between the number
of bidders and the bid levels in BC school construction
projects was positive prior to the SDFWP and negative
afterwards (Bilginsoy, 1999). This result was attributed to
the transformation of nature of uncertainty facing the bid-
ders, whereby elements of the common values model
became less and private values model became more import-
ant after the establishment of the SDFWP. In the present
paper, the question is how the dispersion of bids changes
with the degree of competition and the changing regula-
tions. Wilson (1977) and Holt (1979) predict that the bid
dispersion would decline as the number of bidders increases
under the independent private and common values
assumptions. Numerical illustrations by Dyer and Kagel
(1996) also yield an inverse relationship between the bid
dispersion and the degree of competition under both the
and whether the magnitude of this inverse relationship is
a ected by the change in labour market regulation.
III. THE DA TA
The data for the present study come from tenders received
for 54 new public school construction projects in six dis-
tricts in BC between August 1989 and December 1995. Of
the 54 projects, 25 were tendered before 31 March 1992 and
29 were tendered afterwards. All post-SDFWP projects
were covered by the new regulation. Thirty-nine of the
projects are for elementary and 15 for secondary schools.
Tenders for 17 elementary schools were received before the
SDFWP and the remaining 22 afterwards. For the second-
ary schools these gures are seven and eight, respectively.
Thus, the number and the type of schools are distributed
approximately evenly across the two periods.
The dataset lists individual general contractors and their
bids for each project. In order to standardize bids across
projects, bids are expressed in square-metre prices (in 1989
prices). Table 1 summarizes basic statistics on bids and the
number of bidders. A total of 452 bids were made on 54
projects, 197 before the SDFWP and 255 afterwards. The
mean bid value is $1461. The mean value increased signi -
cantly across the two periods, however, from $1362 to
$1538. This di erence is statistically highly signi cant (t-
value 8:85;p 0:00). The standard deviation, however,
is lower in the post-SDFWP period, declining from 222 to
199. The di erence in standard deviations is also statisti-
cally signi cant, albeit at a lower level (F-value 3:77;
p 0.05:
The average number of bidders per tender for the whole
period is 8.37. The number of bidders for each project
varied between four and 17. There is some di erence
between the number of bidders per auction in the pre-
and post-SDFWP periods. The mean number of bidders
 Bid dispersion, competition and wage regulation 719
Table 1. Summary statistics

All tenders Before SDFWP After SDFWP

Bid Mean 1461 1362 1538

Stand. Dev. 227 222 199
Range 965 2094 965 1938 1167 2094
N 452 197 255
Number of bidders Mean 8.37 7.88 8.79
Median 8.00 8.00 9.00
Stand. Dev. 2.55 2.11 2.85
Range 4 17 4 15 5 17
N 54 25 29

Table 2. Bid dispersion

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All tenders Before SDFWP After SDFWP

Money left on the table (level) Mean 18.54 23.46 14.31

Stand. Dev. 16.20 3.28 15.04
Min-max 0.01 71.24 1.71 52.94 0.01 71.24
Money left on the table (per cent) Mean 1.38 1.91 0.93
Stand. Dev. 1.26 1.36 0.99
Min-max 0.00 4.87 0.14 4.57 0.00 4.87
Number of observations 54 25 29

increased by 0.9 after the change in the regulatory environ-
ment. The median, perhaps the more appropriate measure
of the central tendency since the distribution of the number
of bidders is non-normal, increased by one. The hypotheses
of equality of the pre- and post-SDFWP means and med-
ians are tested and neither are rejected. The data also
rejected the hypothesis that the standard deviations of
the number of bidders are equal across the two periods
( p 0:07).
I V . B I D D I S PE R S I ON
The di erence between the winning and the next-lowest bid
money left on the table (MLOT) focuses on the left-
hand tail of the bid distribution. MLOT was measured in
both absolute and relative terms, as the di erence between
the two bids and as the percentage of the winning o er. A
large value of MLOT indicates that the bidders underlying
signal values exhibit high variation and may also suggest
higher likelihood of winners curse (Dyer and Kagel, 1996).
Table 2 presents summary statistics of the MLOT. The
mean values of the absolute and relative MLOT are $18.54
and 1.38%, respectively. The relative MLOT is even lower
than the 2.10% Dyer and Kagel (1996) observed in the case
of new public school and public facility construction in
Houston, TX. In the OCS lease auctions, MLOT was on
average 50% (Hendricks et al. , 1987). Hence, the present
gures corroborate Dyer and Kagels conclusion that in
comparison with the OCS lease auctions, the potential
for the winners curse is much smaller in construction.
Mean values of MLOT declined after the establishment
of the policy. Average absolute MLOT declined from
$23.46 to $14.31. The null hypothesis that the mean values
of dispersion are equal across periods is rejected for both
the absolute ( p 0:04) and the relative ( p 0:01) MLOT.
These ndings suggest rising compactness in bids at the low
end of the bid distribution. It is observed from Table 2 that
the standard deviations were also lower in the post-
SDFWP period.
Pearson correlation coe cients between bid dispersion
and the number of bidders and the average bid size (a
proxy for the true cost of construction) across tenders are
reported in Table 3. The two statistically signi cant corre-
lations in Table 3 suggest that, for the whole sample, both
measures of the MLOT varied inversely with the number of
bidders. For sub-periods, the correlation coe cients are
also negative but not statistically signi cant. Correlation
coe cients between MLOT and the average bid price sug-
gest that the relationship between the two variables were
altered after the SDFWP. They are most strongly negative
for the pre-SDFWP period. For the whole sample, the
coe cient is still negative but much smaller in value.
Post-SDFWP coe cients are even smaller with positive
and negative signs for the absolute and relative measures
of the MLOT, respectively.
The preceding statistical analysis shows that distribu-
tions of bids across tenders were somewhat a ected by
the SDFWP. No signi cant patterns emerge, however,
 720 C. Bilginsoy
Table 3. Correlation coe cients

Number of bidders Average bid

Money left on the table (level) All tenders 0:266 0:059

(0.05) (0.67)
Pre-SDFWP 0:213 0:189
(0.31) (0.37)
Post-SDFWP 0:245 0.038
(0.20) (0.85)
Money left on the table (per cent) All tenders 0:267 0:094
(0.04) (0.50)
Pre-SDFWP 0:246 0:226
(0.23) (0.28)
Post-SDFWP 0:233 0:003
(0.22) (0.99)
Note: Signi cance levels in parentheses.
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from the correlation coe cients between the bid disper-
sion, on the one hand, and the number of bidders and
the average bid, on the other. In the next section, the
impact of the SDFWP on the bid dispersion is explored
in more detail in a multivariate context.
V . M U L T I V A R I A T E A N A L Y S I S OF TH E
T E N D E R S PR E A D
Auction theory predicts that bid dispersion declines with
the rising degree of competition, i.e. the number of
bidders. 1 Wage regulation is also expected to reduce dis-
persion at all levels of competition , by reducing the com-
mon uncertainty related to the labour market, on the one
hand, and by reducing any di erences in wages paid by
contractors, on the other. These hypotheses are tested in
this section using a regression model explaining variations
the MLOT by the regulatory environment, the number of
bidders, the average bid, the construction sector business
cycle, and school type. The estimated equation is:
ML OT 0 1 SDFW P
2 1=N
3 SDFW P 1=N
4 Average bid
5 Construction cycle
6 School type "
where ML OT stands for either measure of the money left
on the table; SDFW P is a dummy variable equal to one in
the post-SDFWP period and zero otherwise; Average bid is
the mean bid value of the project ; Construction cycle is the
percentage di erence between the trend and the actual
value of non-residential building permits; Secondary school
is a dummy variable that takes the value of one for sec-
ondary schools and zero for elementary; " is the error
term. 2
The critical variable in Equation 1 is the SDFW P
dummy. If 1 < 0, then the after-SDFWP bid dispersion,
at any level of competition, is lower by a constant amount.
The regulation dummy also enters the equation in inter-
action with the number of bidders because the SDFWP has
been observed to a ect the relationship between of the
degree of competition and bid prices (Bilginsoy, 1999).
Ignoring 1 , if 2 is positive, as predicted by auction
theory, and 3 is negative, then the post-SDFWP bid dis-
persion will be lower than the pre-SDFWP dispersion at
any level of competition.
Estimates of four versions of Equation 1 are presented in
Table 4. In estimation, the e ect of the SDFWP is initially
ignored by restricting coe cients 1 and 3 to zero.
Regressions (1) and (5) report the ordinary least squares
estimates of this speci cation using relative and absolute
MLOT as the dependent variable, respectively. In both esti-
mations only a small fraction of the variation in the bid
dispersion is explained. The coe cients of determination
are 11 and 9%, respectively, which are one-quarter and
1 one-half of the R2 s of the corresponding Dyer Kagel regres-

1
Note that if contractors with high estimated costs do not submit bids, then the number of bidders is an endogenous variable, and not an
appropriate measure of the degree of competition. While this is a signi cant problem in the OCS auctions where rms who already drill
in the neighbouring tracks have more information on the value of the auctioned tracks (Gilley and Karels, 1981 ; Hendricks et al. , 1987) .
School construction projects are relatively standard and the scope of such informational advantage is likely to be far smaller than is
observed in the OCS lease auctions.
2
Initial regressions included district dummies as control variables and, in light of the relatively strong correlation between the MLOT and
the average bid in the pre-SDFWP period, the interaction term for the SDFW P and Average bid. These variables were subsequently
dropped because their coe cients turned out to be statistically insigni cant in all estimations.
 Bid dispersion, competition and wage regulation 721
Table 4. Determinants of bid dispersion

MLOT (%) MLOT (level)

Variable (1) (2) (3) (4) (5) (6) (7) (8)

Constant 0.29 0.61 0.92 0.37 4.03 8.99 9.86 4.70

(0.43) (0.62) (1.37) (0.58) (0.46) (0.68) (1.10) (0.55)
SDFW P 70.41 70.96 77.34 78.84
(0.33) (2.80) *** (0.43) (1.93)*
1/N 10.28 11.67 9.58 13.18 124.20 123.47 117.64 150.23
(2.13)** (1.77)* (2.11) ** (2.84)*** (1.99)* (1.39) (1.93)* (2.41) **
SDFW L (1/N) 74.08 76.97 711.32 762.54
(0.66) (2.82)*** (0.09) (1.88) *
Average bid 72.4E-08 73.9E-08 1.2E-07 73.5E-08 77.6E-08 72.5E-07 72.6E-07 71.8E-07
(0.34) (0.59) (1.53) (0.54) (0.09) (0.28) (0.30) (0.21)
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Construction cycle 71.3E-02 71.4E-02 71.6E-02 1.2E-02 79.2E-02 0.17 0.17 0.13
(0.69) (0.43) (0.17) (0.67) (0.22) (0.38) (0.40) (0.30)
School type 76.7E-02 0.12 0.15 8.7E-02 73.00 71.13 71.05 71.62
( 1 if secondary) (0.95) (0.12) (0.15) (0.09) (0.23) (0.09) (0.08) (0.13)
R2 0.11 0.24 0.23 0.24 0.09 0.16 0.16 0.15
Adj-R2 0.04 0.14 0.15 0.16 0.02 0.05 0.07 0.06
F 1.48 2.42** 2.92** 2.94** 1.21 1.44 1.76 1.72

Notes: t-statistics in parentheses. ***, ** and * indicate statistical signi cance at the 1%, 5% and 10% levels, respectively.

sions (which were based on a signi cantly larger sample).
The most important nding reported in these regressions is
that both the relative and absolute MLOT decline with the
number of bidders. According to regression (1), an incre-
mental increase in the number of bidders, say from eight
to nine, lowers the relative MLOT by 0.14 percentage points
(or about 10% of the mean relative MLOT). If the depen-
dent variable is the absolute MLOT (regression 5) , the same
change in the degree of competition reduces the di erence
between the lowest two bids by approximately $1.70. Both of
these ndings are statistically signi cant ( p 0:04 and
p 0:05, respectively), and are consistent with the correla-
tion coe cients reported in Table 3. They also conform with
the results obtained by Dyer and Kagel,3 but contradict
some of the ndings of Hendricks et al. who observed that
the absolute MLOT rises with the number of bidders in OSC
lease auctions. Other explanatory variables included in the
regression do not have any statistically signi cant e ect on
the bid dispersion.
In regressions (2) and (6), the SDFWP slope and inter-
cept dummies are introduced simultaneously. Although the
explanatory powers of both regressions rise appreciably,
neither of the dummies is statistically signi cant and,
although the inverse relationship is preserved, the signi -
cance level of the coe cient of the number of bidders
declines. This is the outcome of high degree of collinearity
between 1=N, SDFW P and SDFW P 1=N. 4
The remaining four equations drop SDFW P and
SDFW P 1=N alternatively in response to the multicolli-
nearity problem. In all four equations the regulatory change
is observed to have a notable e ect on the bid dispersion. In
regression (3), MLOT is still inversely related to the number
of bidders and this relationship is statistically signi cant
( p 0:04). After the establishment of the SDFWP, there
was also a sharp decline in bid dispersion, and this impact
has an even higher statistical signi cance ( p 0:01). At any
given level of competition, the predicted MLOT is lower by
approximately one percentage point after the SDFWP.
Regression (4) yields a similar result, although this time
the SDFWP is hypothesized to a ect the bid dispersion via
the degree of competition. Following the SDFWP, there is
still an inverse relationship between the MLOT and the
degree of competition, but the magnitude of this relationship
is smaller. At any given number of bidders, the post-
SDFWP bid dispersion is smaller.
In order to underscore this nding the predicted relative
MLOTs from regression Equations 3 were plotted under
the assumptions that School type 0, Average bid $1400
and Construction cycle 0. The number of bidders is
allowed to vary between two and 17. The predicted relative

3
The estimated coe cient and its standard error in the relative MLOT regression are surprisingly close to Dyer and Kagels estimates of
10.1 and 4.1, respectively. Dyer and Kagels sample size is 295 projects.
4
Variance proportions of the three variables are 0.81, 0.86 and 0.84, respectively, with the condition index equal to 23.
 722
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Fig. 1. Predicted values of relative money-left on-the-table
(ML OT ) (from regression (4))
MLOT values are plotted on Fig. 1. This chart rst illus-
trates that as the number of bidders increases, bid disper-
sion declines. Secondly, bid dispersion in the post-SDFWP
period is lower at any degree of competition. MLOT for
the pre- and post-SDFWP periods are 6.96 and 3.47%,
respectively, if there are only two bidders. This 3.5 per-
centage point di erence in MLOT declines gradually as
the number of bidders increases. With 17 bidders, the
MLOT of post-SDFWP tender is 0.73%, 0.4 percentage
points lower than the pre-SDFWP value.
Regression (6) and (7) carry out the same exercise for the
absolute MLOT. The explanatory power of these regres-
sions and statistical signi cance of the coe cient turn out
to be lower in this case but these regressions yield results
similar to those reported in columns (3) and (4). The abso-
lute bid dispersion varies inversely with the number of bid-
ders, and is lower during the post-SDFWP period than in
the pre-SDFWP period.
V I . C ON C L U S I ON
This paper attempts to contribute to the growing empirical
literature on eld evidence on auctions. It calculated the
di erence between the winning and the next-lowest bids
for BC public school construction projects tendered between
1989 and 1995, and explored the relationship between the
bid spread and number of bidders, average bid price, school
type and business cycle. The calculated MLOT shows that
the construction project auctions bids are very compact, far
smaller than is observed in OCS lease auctions, and it is an
inverse function of the number of bidders.
One unique advantage of the BC data set is that it allows
experiments to be carried out on the behaviour of the con-
tractors under alternative regulatory environments. The
C. Bilginsoy
SDFWP, established in 1992, determined and implemented
wage scales to construction trades. Change in regulations
may a ect the nature of uncertainty, reducing the relative
weight of the common values model elements a ecting the
bidding behaviour, and also reduce one potentially signi -
cant source of di erence wages paid across contractors.
Both factors would cause the bid dispersion to become
more compact. Evidence from BC supports this hypothesis.
Dyer and Kagel (1996) suggested that although there is
no necessary relationship between the two, the MLOT is a
potential indicator of the likelihood of winner s curse in
common value auctions. Noting that the MLOT of the
construction projects is far smaller than that of the OCS
lease auctions (by an order of seven), for instance, they are
able to state that the likelihood of adverse selection is far
smaller in the former. By the same token, comparison of
the pre- and post-SDFWP MLOTs of the BC projects
reveals that the bid spread declined after establishment of
the law and the potential for the winners curse has become
lower. This impact of regulation on the nature of uncer-
tainty must be of interest to policy-makers because avoid-
ing the winner s curse bene ts both the contractors and the
owners of public construction. Losses by a contractor who
is unable to nish a construction project below the contract
price may ultimately spill over to owners as scheduling
delays, lower construction quality, higher change order
prices, legal expenses and, ultimately, more tax dollars.
A C K N OW L E D G E ME N T S
I am indebted to Clyde Scollan and Greg Sewell for pro-
viding the raw data and detailed information on the British
Columbia construction industry, and an anonymous
referee for comments. I am responsible for all errors.
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